Goldman's Concern Over The Economy Is Growing

Tyler Durden's picture

Goldman's go to bull, Jim O'Neill, starting to get decidedly bearish. Also, as if economic commentary interspersed with soccer from Janjuah wasn't enough, O'Neill is here to offer the Red Devil perspective.

Exciting with Risks......and Worried........

Week 3 of 2010 comes to an end,……not a pleasant one.   Anyhow, in the three weeks so far, we have witnessed evidence of the things that support why our views are "exciting" and, unfortunately, more important ones of why " with risks" has been there. Of possible interest;

1. BRICs…………For those of you that often doubt much of the data from China and elsewhere in " BRICland", the FT has kindly being doing a special all week long on the whole theme, with lots of colourful local stories. Over the weekend, if you have some time, take a gander…

2. China.

The data this week, including news of their remarkable success of achieving 8.7pct GDP growth for 2009, which continues to broadly highlight the remarkable divergence between the C , most of the rest of the BRICs, and large EM , and the so-called developed West. On balance , the data reported for December was slightly softer than expected, but in the general scheme of things, it was all remarkably strong. And as discussed in the media, we count the weeks until China now overtakes Japan to become the world's number 2.

I have been out and about this week, including brief trips to Frankfurt and Brussels , as eell as meeting clients in and around London. I have met with more companies who have large business expansion taking place in China, and without exception, they all have talked about their own anecdotes to back up the flavour of the reported data.

The continued "new issue" is of course, inflation, and this week's reported rise in PPI and CPI , on top of the strong data, has resulted in more concerns about fresh specific and additional steps to tighten policy. This is almost definitely coming, and it might not "feel" good when it comes. However, and I am already starting to get this feeling, people shouldn’t go overboard about this. China wants to slow things down a touch, reduce the risk of a significant pickup in inflation, and they are pretty likely to succeed. So while Chinese related markets have probably got further to correct, I can't see a real "bear market" as such. Indeed, the general wide 2,600-3,400 for the A -share market that I have believed in since the late Summer 2009 peak looks set to prevail to me.

3. Coincident and lead indicators. We have had some quite mixed data again this week, with a couple of new , slightly positive surprises in Japan and Europe ( after disappointments at the margin previously ) but in terms of new information, and high frequency, and as a key part of our own global leading indicator, the GLI, the Philly Fed disappointed yesterday. Linked to this, while our year on year Advanced GLI for January has moved back into clear positive territory- 1.2pct-, the momentum is showing signs of slowing. The Euro area PMIs hint at the same also..

4. Policy in Europe. As I mentioned , I spent yesterday in Brussels, and left feeling quite disappointed about policy "imagination" even by the standards of past thinking about such issues re Europe. I get the impression that the new appointments in Brussels are not going to be taking us anywhere, and I don’t think any are equipped to deal with new shocks, or frankly, the Greek issue. I , therefore continue to suspect that the CDS could widen out to levels way beyond much being generally banded about. On top of everything else, what incentive do the big guys have to stop it? On top of making the " Club Med" countries think more seriously about the underlying issues, the Euro is now dropping because of this also, which of course, is an aspect that pleases EU and ECB policymakers……..better than anything else they must have spent endless hours thinking about ways to weaken the Euro….

5. Mood in Germany? After having a dinner with a group of leading CEO's and CFO's, and seeing lots of investors, I am not really sure. Lots of gloom about Russia stood out, but on everything else, people seemed very mixed.

6. Washington and US financial conditions…

Which leaves me to this topic. If the "shock " of the UK supertax wasn’t enough, now we have out of the blue, Tall Paul Volcker's ideas suddenly appearing as US "policy" on banks. There are an enormous number of policy issues raised by this development, such as ; will the proposals ever come to pass, should they be seen in the context of the Massachusetts development, who is running economic and financial policy, etc and plenty more, that I don’t think it is appropriate for me to write about , at least in this kind of format. But the core issue to me, is as follows;

a/ this is a second major, and much bigger "anti current practises" surprise to the financial system since mid December, and at least for me, both have been quite a surprise, and completely at odds with the co-ordinated G20 flavour of much of late 2008 through most of 2009. How many more, such surprises, are coming?

b/ much more importantly than being surprised, what is this going to do to financial conditions? One would have thought policymakers would be eager to avoid an inadvertent tightening of financial conditions, given what happened in 2008 and the whole parallel with the initial recovery from 1929 before you know what………but the style in which both the UK, and now the US policies have appeared suggest that this is not at the forefront of thinking. I guess this latest development at least adds to the probability of our Fed Funds forecast being right, but ….

I have been thinking since the Summer, with some confidence that the upside risks to a US recovery were likely to keep re-appearing, but given both the political and policy events, and with this fresh major degree of uncertainty introduced to the financial markets, upside US risks are increasingly going to relate purely to one area, exports…

Last Friday , I had an interesting debate with an extremely well known bear , for the amusement of some hedge fund clients. If it would have been this morning, I would have found it much tougher to battle him………

7. United. And then, to top off such a fun week is this ongoing saga…………….Let's see if Rio can cheer us up tomorrow.

Thank God for the BRICs and Rooney…….

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Escamillo's picture

Goldman Sachs guys talking about United:  I didn't know what Roy Keane meant about the "prawn sandwich crowd" at OT until now. 

THE DORK OF CORK's picture

Roy sold his immortal soul when he signed for United - he should have went to Liverpool , the lower pay he would have received would be a form of papal indulgence

Escamillo's picture

I can't resist:  Roy Keane's finest moment, in the tunnel with Patrick Vieira.


Anonymous's picture

Souless and fagot, as already proven in his lame exit from Sunderland and now he is killing Ipswich, lame lame lame ass hole Roy.

Anonymous's picture

As opposed to selling his mortal soul?

Herd Redirection Committee's picture

LOL,  yeah the ones who look at United and just see $$$ signs everywhere!

Ticket prices, we could increase those!  Player transfers, who needs em!  Selling our best players?  Sure, if you will pay us a 10% premium we got a deal!

Rooney will soon be saying goodbye to Manchester, and hello Madrid...

trav7777's picture

Perhaps the market rally reflected the expectation that a huge rate cut and cheap money regime would cause economic growth again as it always had in the past...?

The mercilessly unrelenting nature of the bad numbers coming out may be close to achieving a collective point of recognition that earnings aren't going to grow into the current price levels

Cognitive Dissonance's picture

"The mercilessly unrelenting nature of the bad numbers coming out may be close to achieving a collective point of recognition that earnings aren't going to grow into the current price levels"



This whole thing, the last 6 months of the stock market rise, looked so much like the cart (the economy) was placed before the horse (business and consumer fundamentals), with the cart driver desperately hoping that if the cart drags the horse down the road a bit (juiced by a "liberal" money policy) the horse might just be inspired to gallop up front and take over the hauling duties.

Perception is reality in a leverage fiat currency environment and the hope was that of you could convince enough people all was well, "presto" all will be well. But at some point fundamentals must be dealt with.

Was the outcome ever in doubt when the entire policy was extend and pretend? Well, in reality it "worked" (I could argue it did not work except for a small sector of the population) many times before. The only difference this time was the scale, not the process.

I just don't see this ending well.

Anonymous's picture

How do you "extend and pretend" the final outcome of this disaster ?

We are trapped in a massive deflationary black hole debt vortex which spins inexorably towards oblivion!

The big US banks are ALL bankrupt.
Tens of millions of household are bankrupt.
Real estate continues to devalue.
There is ZERO job creation.
The stock market is a rigged rip-off sham.

And the Fed is determined to destroy the currency propping this whole charade up!

The finance geniuses (GS) really f'cked us this time!

Daedal's picture

The mercilessly unrelenting nature of the bad numbers coming out may be close to achieving a collective point of recognition that earnings aren't going to grow into the current price levels

No doubt. The problem is perception, which is manipulated via "better than expected" reports. I forget where I saw the following (Yahoo or Bloomberg), but there was a report of companies that beat analyst expectations.

Those that beat were colored green, and those that missed were red. I'd say 80% of the list 'beat' expectations, and I recall distinctly that Citi was part of that list, highlighted in Green. Meanwhile they lost almost $8 billion!

Once these illusory perceptions confront reality, a bloodbath in stock prices will ensue.

Anonymous's picture

Roubini suggests that nationalizing Fannie and Freddie would require an increase in taxes or cuts in other public spending, but there are other possible funding solutions, ones with quite successful historical precedents. If the multiple layers of profiteers, speculators, derivatives, commissions, bonuses, fees and general fraud were eliminated from the mix, a nationalized Fannie/Freddie could finance itself. This was proven in the 1930s with the Home Owners’ Loan Corporation (HOLC), a government-owned agency set up to reverse a disastrous wave of home foreclosures. The HOLC was funded by the Reconstruction Finance Corporation (RFC), another wholly government-owned agency that performed the functions of a public bank. The RFC successfully funded not only the New Deal but America’s participation in World War II. In a February 2008 article in The New York Times, Alan Binder recommended a return to the HOLC model as a way out of the current mortgage crisis. He wrote:

“The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks . . . and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.

“The scale of the operation was impressive. Within two years, the HOLC granted over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending amounted to $3.5 billion. . . . (The corresponding figure today would be about $750 billion.)

“As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. . . . But times were tough in the 1930s, and nearly 20 percent of the HOLC’s borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.

“Today’s lift would be far lighter. . . . Given current low interest rates, a new HOLC could borrow cheaply and should find it easy to earn a two-percentage-point spread between borrowing and lending rates, for a gross profit of maybe $4 billion to $8 billion a year.”8

The RFC initially capitalized the HOLC by buying all of its stock for $200 million. The HOLC was then authorized by statute to issue ten times that sum (or $2 billion) in tax exempt bonds. In the same way, in 1937-38 the RFC created and funded Fannie Mae as a wholly government-owned agency, for the purpose of injecting money into the banking system so that banks could increase the volume of home mortgages. The RFC and its agencies funded their operations by selling bonds at a modest interest to the Treasury and the public, then relending the acquired funds at a slightly higher interest. The “spread” was sufficient to cover operating costs and losses from default and still turn a modest profit.

How did the HOLC manage to reverse a far worse foreclosure crisis than we have today and still turn a profit, when Fannie and Freddie – which also raise their loan money by selling securities to investors – have become hopelessly bankrupt in that pursuit? The difference seems to be that the HOLC was a public institution operated as a public service. Fannie and Freddie are private, profit-making ventures designed to make money for their investors and political exploiters. As Professor Roubini observes, “These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.” When the profiteering is taken out and the business is run as a public service, the math works.

There is another American model that is even older than the HOLC, which presents even more exciting possibilities. In the first half of the 18th century, the province of Pennsylvania completely funded its government without taxes or debt, through a publicly-owned bank that issued paper currency and lent it to farmers. The bank did not have to borrow capital before it made loans; it just created the currency on a printing press. The money was lent rather than spent into the economy, so it came back to the government in a circular flow, avoiding inflation; and interest on the loans was sufficient to fund the government’s operations without taxation. Such a public bank today could solve not only the housing crisis but a number of other pressing problems, including the infrastructure crisis and the energy crisis. (See E. Brown, “Sustainable Energy Development: How Costs Can Be Cut in Half,”, November 5, 2007).

Once bankrupt businesses have been restored to solvency, the usual practice is to return them to private hands; but a better plan for Fannie and Freddie might be to simply keep them as public institutions. In the August 8 London Tribune, British MP Michael Meacher proposed this alternative for Northern Rock, a major British bank that was recently nationalized after becoming insolvent. He wrote:

“[W]hen the banks have failed the public interest so badly and still even now continue to pursue so single-mindedly their commitment to privatise their gains whilst socialising their losses, would not a publicly owned bank be the most effective way of changing the current corrosive financial culture of short-termism, lower investment, house price inflation, and insider enrichment at the expense of systemic fragility for everyone else? Perhaps we should not return Northern Rock to the private sector after all.”9

Perhaps we should not return Fannie and Freddie either.

Anonymous's picture

Very informative and interesting....

bugs_'s picture

Goldman about to go "hands off" - its not our market.

We didn't touch it last.  Who touched it last?

Anonymous's picture

+100 trav7777

Anonymous's picture

but were GS not predicting S&P 1250 (not too long ago) with Mr. Doll whose Blackrock put their hands up on the Stuyvesant nightmare ?

waterdog's picture

Is this guy twittering to himself, while sitting next to a Nigerian kid, waiting for their plane to leave the terminal?


Anonymous's picture


Of course he did, their entire racket is being exposed.

Dont be a dipshit and think for a second that the crooks aren't just putting on a pity party.

Up for 2010, lying, cheating and stealing!

Hey Goldman, you deserve everything bad that happens to you and so do your traders!

miker's picture

Geez, I can see why these Goldman guys need to makes so much money.  Such insightful babbling......I mean really.  And he gets to travel all over to cool places to smooze with the other high paid financial types.  Does anyone do an honest day's work for an honest day's pay anymore?

Baron Robber's picture

not wall street executives at TBTF banks. paying their lobbyists is the most exhausting thing they do.

Gold...Bitches's picture

Its all electronic these days with a click of the mouse and a couple million on its way.  Oh boy, I'd be exhausted too after that.  I think I need a few hundred million to do that job

Leo Kolivakis's picture

Goldman is bearish? Time to load up as the economy will surprise all of them to the upside in the coming months.

THE DORK OF CORK's picture

Leo you see the SUNNY side in everything

BS Inc.'s picture

Wait a second, the whole time they've been bullish (the entire point of this post being that they are turning bearish), you've also been bullish. Why weren't you bearish when they were bullish, if you're using them as a contrarian indicator, as your comment suggests?

Didn't the Greeks invent logic?

THE DORK OF CORK's picture

Dork is confused now , I will lie down and do logic

Busy-Body's picture

Fundamentally speaking, no chance in hell.

QE/Extend & Pretend, quite possible.

Anonymous's picture

you are utterly ignorant to read -- I seriously hope your boat is loaded.

gmak's picture

Maybe they should have lunch with Bill Miller to get that "Gosh it's good to juice the market" feeling back.

Gold...Bitches's picture

isnt it amazing what buying a few hundred million SPY's will do for the market?

Anonymous's picture

wonder when Leo will be selling ? I'd really like to load up on equities then .. hahahaha

Anonymous's picture

When he's talking about "United," does he mean Man U, United Technologies, United States, Citizens United, or what? All are potential total clusterfucks.

Anonymous's picture

Goldpants speaks both ways, useless to listen to them.
At least ZH and people here are consistantly bearish.

Reality: Market keeps going up. Government will keep proping it up and negative data will keep confusing people.

What if hell breaks lose: People are highly adaptive and basic survival skills are embedded in every living being, including humans. Mobs are even smarter....

Unfortunately quants are not that smart they die easily.

People immigrate to where the grass is green and potash is cheap. Long as there are immigrants willing/dying to come to this land, the greater fool theory will go on and markets will recover. Of course, Ben B should stop printing for this to happen...

Dirtt's picture

Yes. And more and more tenants will be writing rent checks to guys speaking Chinese.

Dirtt's picture

Can someone enlighten me as to the Rooney reference?  I know he's not laying bets for the Steelers.

Dirtt's picture

Wayne...the footballer. Thanks. got it.

Mr Lennon Hendrix's picture

GS to short market (with good reason, market is over valued) until the inflation beast is too much for them to handle.  They had already shorted solars, nat gas, and commodities (they tried to short gold, silver, and oil, but that did not work out very well).  now they short everything else (see google as the starting point).  bears to come out of hiding for the next couple months.  then by april, hyper inflation will be setting in, and once the shorts subside the bottom will not hold any longer.

pak's picture

"but the style in which both the UK, and now the US policies have appeared.."

The limits on prop trading and taxation of bonuses (which they should've anyway paid to the taxpayers and Ben Shalom (in this order), not to themselves) are not part of what has historically been known as "financial conditions", unless of course Mr. O'Neill thinks his own "financial condition" and that of his colleagues are THE only thing that matters for global economy.

"better than anything else they must have spent endless hours thinking about ways to weaken the Euro"

So why should Trichet & Co. be referred to as a bunch of lame ducks, if things are working their way anyway?

Looking at the superficial character of analysis produced by the squid, I wonder why they need to publish this at all.